Asbury Automotive Group, Inc. — Q2 2013 Form 10-Q
Business and reporting period. The filing covers the quarter and six months ended June 30, 2013, compared with the same 2012 periods. Asbury operated 97 franchises at 76 dealership locations in 18 metropolitan markets across 10 states, plus 23 collision repair centers. Its portfolio comprised 29 vehicle brands, weighted 85% toward luxury and mid-line imports.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $1,344.5 million | $1,161.5 million | $2,569.9 million | $2,231.5 million |
| Gross profit | $221.9 million | $191.8 million | $428.6 million | $376.3 million |
| Operating income | $57.4 million | $47.0 million | $110.0 million | $88.4 million |
| Income from continuing operations | $27.2 million | $20.9 million | $51.1 million | $38.1 million |
| Net income | $27.0 million | $21.1 million | $59.5 million | $38.7 million |
| Diluted EPS | $0.87 | $0.67 | $1.91 | $1.22 |
- Q2 revenue increased 16%, gross profit 16%, operating income 22%, and net income 28%. Six-month revenue rose 15%, gross profit 14%, operating income 24%, and net income 54%.
- Q2 gross margin was 16.5%, unchanged year over year; six-month gross margin was 16.7%, down 20 basis points. SG&A was 69.5% of gross profit in Q2 versus 72.2%; for the six months it was 70.5% versus 73.3%.
- Q2 revenue growth reflected higher new vehicles (+15%), used vehicles (+20%), parts and service (+9%), and finance and insurance (+27%). Same-store new vehicle units rose 9% in Q2, while same-store used retail units rose 20%.
- Parts and service and F&I were notable gross-profit contributors: Q2 gross profit increased 14% and 27%, respectively. Same-store new and used vehicle gross margins softened; same-store new vehicle gross profit per vehicle fell 4% in Q2.
Cash flow, balance sheet, and financing
- Six-month GAAP operating cash flow was $24.7 million, versus cash used of $17.9 million in 2012. The company’s non-GAAP operating cash flow “as adjusted” was cash used of $40.1 million, compared with cash provided of $75.9 million. Management attributed the adjusted decline primarily to inventory net of floor-plan debt and a $92.8 million increase in the floor-plan offset account.
- Investing cash flow was positive $3.3 million, compared with negative $26.3 million. Financing cash flow was positive $32.8 million. Cash rose from $6.2 million at year-end 2012 to $67.0 million at June 30, 2013.
- At June 30, total assets were $1.755 billion and shareholders’ equity was $453.6 million. Inventory was $712.5 million, up from $648.5 million at year-end. Long-term debt, including current maturities, was $585.8 million, versus $466.0 million at year-end; trade and non-trade floor-plan notes totaled $497.5 million.
- Reported available liquidity was $408.0 million: $67.0 million cash, $233.1 million of revolving-credit availability, and $107.9 million in the floor-plan offset account. Management said liquidity should be sufficient for at least the next 12 months; all debt covenants were reported in compliance.
- In June, Asbury issued $100 million principal amount of 8.375% notes due 2020 at 109.75% of par, receiving approximately $108.3 million net proceeds. The company stated the proceeds were for general corporate purposes and could be used, with other available funds, to redeem some 7.625% notes due 2017. A $12.5 million fixed-rate mortgage was also entered into during the first half.
- Six-month capital expenditures were $15.8 million excluding real estate, lease purchases, and capitalized interest; management expected approximately $45 million of 2013 capital expenditures excluding real estate. The company repurchased $12.2 million of shares under its authorization and had $37.8 million remaining at June 30.
Outlook, commentary, risks, and unusual items
- Management cited a stronger U.S. new-vehicle market: Q2 SAAR was 15.4 million versus 14.2 million in Q2 2012. It pointed to consumer confidence, credit availability, employment trends, and an aging vehicle fleet, but characterized the recovery as fragile and difficult to forecast.
- Management expected its 2013 effective tax rate to remain between 38% and 40%. It said near-term new-vehicle margins would depend primarily on market supply and demand. The filing provides no formal revenue or earnings guidance.
- Six-month net income included an $8.9 million after-tax gain from the sale of one franchise, reported in discontinued operations. Q2 earnings were reduced by $3.2 million after tax from real-estate-related charges; these included $3.4 million of lease-termination charges and $1.8 million of property and equipment disposal charges before tax.
- In July 2013, after quarter-end, Asbury acquired three franchises at three locations in Atlanta, expected to contribute approximately $115 million of annualized revenue.
- Key risks include economic and consumer-credit conditions, vehicle supply and manufacturer relationships, margin and competitive pressures, interest-rate exposure, access to floor-plan and other financing, debt covenant compliance, litigation and regulatory matters, and the potential for manufacturer-required dealership investments. A 1% interest-rate change could affect annual other interest expense by up to approximately $5.0 million, based on variable-rate debt outstanding at quarter-end.
- The company reported $14.6 million of outstanding letters of credit and a $5.0 million surety bond line. It estimated possible losses above amounts accrued for known claims of up to approximately $0.5 million in aggregate; it did not expect known claims to materially harm results, liquidity, or financial condition, while noting outcomes remain uncertain.
Important facts for investors to verify
- How much of revenue and profit growth came from same-store performance versus acquisitions, and whether vehicle unit growth can persist as margins change.
- Whether improved earnings convert into cash: reconcile GAAP operating cash flow with the company’s adjusted measure, including floor-plan financing and the offset account.
- Debt service and refinancing plans, particularly the use of the June note proceeds and any redemption of the 2017 notes; also monitor variable-rate exposure and covenant headroom.
- The durability of F&I and parts-and-service growth, including the effect of manufacturer recalls and consumer financing availability.
- Integration and realized performance of the July Atlanta acquisitions relative to the stated annualized revenue estimate, and execution against the 2013 capital expenditure outlook.
- Confirm the after-tax effect of the franchise-sale gain and real-estate-related charges when assessing recurring earnings.